Time-varying parameter

General DSGE Modeling
1

Hello all:

This is my first post, though I have been using Dynare for years.

I am trying to study time-varying policy parameters using Ascari’s positive trend inflation model. I want to study this using both first and second order approximation.

If I solve this model by hand and simulate the code, even in the first order I find that this parameter to affect inflation and output and interest rates. Thus, my first order approximation by hand suggests this to be important.

I am now trying to replicate this result using Dynare. I have the excellent code available on the dynare user’s webpage. All I am doing is adding the time varying parameter but surprisingly this does not seem to be corroborating my results. I have little experience with non-linear models, but all I am doing is adding the time-varying parameter, thus the possibility of a coding error is minimal. Can anyone have a look at my code and advise? Cheers.

tor.mod (7.4 KB)

2

Why should we expect anything to happen at first order? If there are no other shocks, inflation is at its steady state and a higher weight on deviations from the steady state does not matter. That logic suggests that at least a second order approximation is required.

3

Thanks. You make sense.

What I am concerned about is why my code doesn’t seem to show any affects in second order as well. I am not sure with this second order approximation.

Cheers!